Saturday, December 5, 2009

The Right Medicine for Healthcare – Part II: A More Competitive Market

Any successful healthcare reform needs to formulate a more competitive health insurance market. A more competitive market will drastically alter the cost structure for health insurance. In order to remain in business, insurance companies in a competitive market will need to drive costs downward. A multitude of new insurance products will be offered which will provide consumers with an array of choices with varying levels of amenity and price. There are at least three ways in which the markets can be made more competitive.

The first, and easiest, step would be to allow insurance companies to compete across state lines. The current, useless restrictions only serve to drive costs upwards. By allowing cross-border competition, the number of insurance providers available to any one individual will immediately increase. Companies will then have to compete with more market participants in order to capture a sufficient segment of the now larger pool of potential clients. This will force insurance providers to develop new types of insurance products and cut their own costs to improve margins.

The second step would be to end the employer-based system of the provision of health insurance. Many Americans currently get their health insurance as a fringe benefit from their employer. However, there are a number of problems with this method of provision. First, those that cannot get insurance through their employer often have to pay exorbitant fees in the private market. Second, health insurance is contingent on employment. When an individual loses his or her job, it becomes a double hit with the elimination (or increased cost) of health insurance. Third, employer provision necessarily limits an individual’s options. Most companies only offer three or four options – all generally from the same insurance company. The individual has little say in terms of picking an option that suits his or her financial and medical needs. Insurance companies therefore only need to offer plans that appeal to a few Human Resource managers, and do not need to offer specialized coverage for unique requirements.

All of these issues can be resolved if individuals or families obtained health insurance on the free market. Like auto, homeowner, or other forms of insurance, health insurance should be an individual’s personal decision. If insurance companies competed for individual policyholders, rather than for corporate HR managers, they would be forced to diversify products to meet individual needs. Insurance policies that ran the gamut from expensive with maximum coverage to limited cost and coverage would be widely available for individual purchase. This would help lower costs as individuals would self-segregate into policies that better meet their needs and budgets [for instance why does a single man need health coverage for an OB/GYN?]. Likewise, entrepreneurial insurance providers will be able to successfully target niche markets that formerly went uncovered.

The end of the employer-based system can be easily achieved through simple legislation. A law that requires employers who provide health insurance to offer an employee opt-out clause would allow individual employees to select their form of compensation. If the individual chose not to receive his employer’s health insurance policy, he would receive the money which the employer would have spent on health insurance. The employee could then turn to the private market to purchase his own policy.

This coincides with the third step: ending tax exemptions for employers. This will further facilitate the transfer from an employer-based system to a free-market system. Not only will this end the incentives for employers to provide insurance, but it will also increase revenues (or allow tax cuts) for the government. Employees will naturally receive higher salaries as their compensation switches from a fringe benefit to direct pay.

All of these steps will facilitate a more competitive environment. Insurance companies will need to compete with a larger number of competitors and for a larger number of potential customers. This will help force costs downward, as only the most efficient and cost-effective insurance companies will be able to survive. Consumers will be offered a wider array of choices, with varying degrees of price and services. Customers will therefore be better able to afford, at least, minimal coverage. A increase in competitiveness would drastically alter the health insurance landscape and promote free-market reform.

The discussion continues with Part III: Lower the Costs.


  1. Great Article Josh,

    I like hearing a different perspective.
    I have a question for you pertaining to the end of the employer based system. In a free-market healthcare system like you suggested, what is preventing people with highrisk/expensive medical conditions from being blacklisted or rejected from health insurance? If their employers are no longer required or banned from offering health insurance to their employees, why would any Healthcare company interested in making a profit pick up anyone with life threatening diseases or illness?

    Who would cover these people?

    I understand the comparison to Auto insurance, in that these people would potentially have higher rates. But the difference is you can total a car when its SEVERLY damaged, You cant total a person who is SEVERLY sick, maybe for the extent of their life. Who would pay for these people? And why would an Insurance company even want to?


  2. Dave~

    Thanks for the comment. First, just to clarify, I don't think that employer based systems should be banned. In my opinion that is too much government overreach into the private sector. I'd would just like to see the incentives changed so the market moves away from the model. (I also just found an old, interesting Op-Ed from Charles Krauthammer who propsed another way of ending the system through taxing employer-based plans and then granting the employee a tax rebate).

    Anyway, I think you asked a very poignant question. First, I'm not sure if a person with pre-existing conditions is necessarily already covered under his employer's plan in the current model. So ending this model might not be directly related to that issue. That being said, I think a free market system would actually serve people, such as those with pre-existing conditions, better.

    The logic behind this is that where there is a demand for a product, someone will inevitably see an opportunity for a profit. A free market would induce insurers to offer a variety of plans - some of which would certainly cater to people with pre-existing conditions (just like there are insurance companies that cater to people with bad driving records). Obviously, such plans would most likely either cost more or have more limited services. I don't believe there is anything intriscally wrong with having to pay more for health insurance if you use it more. After all health insurance is primarily a financial tool. To reduce the tradeoff between cost and service I could easily see customizable plans arise that allow individuals to select services they want to pay for and save money by not getting other services.

    Also, another longer-term option can be built along the lines of life insurance policies. If an individual buys life insurance at a younger age they can often lock in cheaper rates (since they're paying for a longer period of time). Full-service plans, which would generally be unappealable to the young and healthy, could try to be competitive in these markets by offering long-term committments. Since policies would be portable (across state-lines and jobs), they could entice people to join with promises to not drop coverage in the case of severe illness. Likewise, dual-coverage plans could be offered to offset costs.

    Of course the issue arises where some people will most certainly be barred from any free market plan. This minority will most likely be those that do not have prior coverage, are very poor, and have high medical bills. I will cover a possible solution for this in my next and last posting (Part IV) to come.

    Thanks again.



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